If your kids have completed college or you have paid off your mortgage, you might be wondering if now’s the time cash out whole life insurance — and you might be right. Taking the cash value from your whole life insurance is a big decision and it can have lasting impact on your financial life. We’ll help you weigh the benefits and drawbacks of cashing in your policy.
Face Value Versus Cash Value
Making this decision starts with understanding how whole life insurance works. A whole life insurance policy has two components. The first is the face value, or the amount that will be paid to your beneficiaries when you die. The second is the cash value. Your cash value is a savings account that’s funded by a portion of your premiums. When you cash out a policy, you are not getting back your full premium contributions; you will receive the full cash value of the policy.
How to Access Cash From Your Whole Life Insurance Policy
Likely, the longer you’ve owned your policy, the larger your cash value will be and the more options you’ll have for receiving a cash payout. The cash value of your life insurance policy offers you the opportunity to access cash accumulations within the policy through a surrender of the policy, withdrawals or loans. You can even use the cash value to pay for premiums. Below, we’ll outline those options and what they may mean for your situation.
If you’ve had your policy in force for a few years and your policy has accumulated some cash value, you can cancel the policy and take the surrender value in a cash payment. By surrendering your policy, you are giving up the insurance policy and, in return, you’ll receive the cash value less any fees. When you cancel your policy, your heirs will receive nothing from the policy when you die. Although surrendering your policy might get you the cash you need, it should likely be a last resort unless you have adequate insurance coverage in place elsewhere.
If you still need your life insurance policy, you have other options to withdraw cash and keep your life insurance policy in place: withdrawals, loans and premium payment are all options you should consider.
Generally, you can withdraw a limited amount of cash from your whole life insurance policy. In fact, a cash-value withdrawal up to your policy basis, which is the amount of premiums you’ve paid into the policy, is typically non-taxable. Any withdrawals that exceed your basis, meaning you’re dipping into gains, will be taxed at your ordinary income rate. Your death benefit will be reduced based on the amount you withdraw.
A cash withdrawal shouldn’t be taken lightly. Life is unpredictable, and removing any cash from your life insurance policy may leave you vulnerable to life’s uncertainties.
Most cash-value policies will allow you to borrow against your policy with a loan. However, you won’t be borrowing against your policy. Instead, you’ll be borrowing money from the issuer and using your policy as collateral. Depending on the terms of your policy, the loan might be subject to interest. Unless you pay the interest out of pocket, it will be added to your loan balance. If you don’t repay the loan or only pay a portion of it back, the balance of your remaining loan would be deducted from your death benefit. There will also be a maximum loan amount you can receive from your policy; talk with your local Farm Bureau agent to find out the maximum loan amount you can receive and learn more.
If you end up short on cash and are having a difficult time continuing to pay your whole life insurance premium, you may be able to stop paying the premium out of pocket, and, instead, use the cash value of your policy to cover the premium.
We’re Here to Help!
A whole life insurance policy can provide you with several options. Every situation is unique and we’re here to help. Your local Farm Bureau agent can sit down with you and help you create a plan that fits your needs. Don’t have a Farm Bureau agent? We can help. Use our find an agent feature to connect with an agent near you.